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Author Topic: Re: [FAQ] Is BitCoin a Ponzi or pyramid scheme? (Newbie-Friendly)  (Read 5568 times)
JoelKatz
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March 20, 2013, 06:59:40 PM
 #61

If you think that the only significant source of value Bitcoins will ever have will be speculative value due to people believing their value will increase due to others who will believe the same, then it's not unreasonable to describe Bitcoins as a pyramid scheme, Ponzi scheme, or scam. This would make Bitcoins ultimately a zero sum game where every gain must be balanced out by somebody's loss with those late to the party footing the bill for those who got there sooner.

If you believe that Bitcoins may eventually (or already) have significant value as a means of exchange, then it is unreasonable to describe Bitcoins as a pyramid scheme, Ponzi scheme, or scam. Then buying and selling Bitcoins is not a zero sum game but a distribution of the the value Bitcoins create by providing a superior means of exchange.

Of course, even if it's reasonable to believe the Bitcoins will eventually have significant value as a means of exchange that still might not happen. In that case, Bitcoins aren't a scheme or scam but simply a good idea that failed. Most people will probably wind up losing money if that happens, but that will be because they took a calculated risk and it didn't pan out. That's the nature of risk.

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March 20, 2013, 11:45:53 PM
 #62


Of course, even if it's reasonable to believe the Bitcoins will eventually have significant value as a means of exchange that still might not happen. In that case, Bitcoins aren't a scheme or scam but simply a good idea that failed. Most people will probably wind up losing money if that happens, but that will be because they took a calculated risk and it didn't pan out. That's the nature of risk.


If bitcoin were to fail, I think the worst thing would be people saying 'I told you it was a ponzi scheme' who never bothered to understand the fundamentals...
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March 21, 2013, 01:37:13 AM
 #63

If you think that the only significant source of value Bitcoins will ever have will be speculative value due to people believing their value will increase due to others who will believe the same, then it's not unreasonable to describe Bitcoins as a pyramid scheme, Ponzi scheme, or scam. This would make Bitcoins ultimately a zero sum game where every gain must be balanced out by somebody's loss with those late to the party footing the bill for those who got there sooner.

If you believe that Bitcoins may eventually (or already) have significant value as a means of exchange, then it is unreasonable to describe Bitcoins as a pyramid scheme, Ponzi scheme, or scam. Then buying and selling Bitcoins is not a zero sum game but a distribution of the the value Bitcoins create by providing a superior means of exchange.

Of course, even if it's reasonable to believe the Bitcoins will eventually have significant value as a means of exchange that still might not happen. In that case, Bitcoins aren't a scheme or scam but simply a good idea that failed. Most people will probably wind up losing money if that happens, but that will be because they took a calculated risk and it didn't pan out. That's the nature of risk.


Bitcoin doesn't fit the definition of a Ponzi scheme, wherever you look up the definition, a Ponzi scheme has to be fraudulent, i.e., giving people false information, there is no false information in bitcoin itself, everything is there for you to know.

https://tlsnotary.org/ Fraud proofing decentralized fiat-Bitcoin trading.
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March 21, 2013, 02:09:41 AM
 #64

Bitcoin doesn't fit the definition of a Ponzi scheme, wherever you look up the definition, a Ponzi scheme has to be fraudulent, i.e., giving people false information, there is no false information in bitcoin itself, everything is there for you to know.
It does *if* you believe that the only value Bitcoins could ever reasonably be expected to have comes from other people buying Bitcoins. The fraud then would be the false claim that Bitcoins are a potentially-viable future crypto-currency and thus may reasonably be expected to gain value as a means of exchange, not just a store of value. If that belief is implausible, but widely spread by people who stand to make money from Bitcoins appreciating in value, then it fits the definition of a Ponzi scheme. (Value propped up by unreasonable representations. Only source of value future investments. Early investors profit from the money put in by later investors. Later investors must lose money because there's no real source of produced value.)

That is, of course, a mighty big "if". Most of the people who claim Bitcoin is a Ponzi scheme (at least, in my experience) either don't realize that it's not a Ponzi scheme if there's a reasonable expectation of significant future value from a source other than investment or don't believe such an expectation is reasonable.

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March 21, 2013, 03:11:39 AM
 #65

Bitcoin doesn't fit the definition of a Ponzi scheme, wherever you look up the definition, a Ponzi scheme has to be fraudulent, i.e., giving people false information, there is no false information in bitcoin itself, everything is there for you to know.
It does *if* you believe that the only value Bitcoins could ever reasonably be expected to have comes from other people buying Bitcoins. The fraud then would be the false claim that Bitcoins are a potentially-viable future crypto-currency and thus may reasonably be expected to gain value as a means of exchange, not just a store of value. If that belief is implausible, but widely spread by people who stand to make money from Bitcoins appreciating in value, then it fits the definition of a Ponzi scheme. (Value propped up by unreasonable representations. Only source of value future investments. Early investors profit from the money put in by later investors. Later investors must lose money because there's no real source of produced value.)

That is, of course, a mighty big "if". Most of the people who claim Bitcoin is a Ponzi scheme (at least, in my experience) either don't realize that it's not a Ponzi scheme if there's a reasonable expectation of significant future value from a source other than investment or don't believe such an expectation is reasonable.


Wrong, you could claim whatever you want about bitcoin, a certain stock, etc, but that doesn't make that particular investment a Ponzi scheme, as you are just another normal investor, you are in a no more special position than the next one in the line. What really matters is what the people "run" it say, which bitcoin doesn't have any, and every bit of information is open and freely accessible, if you don't look it up it's just your laziness and can't blame anyone else. Besides, as bitcoin is not run by any people, it will never promise you high income return, an essential part of the running of a Ponzi business, you will just have to do the risk assessment yourself.

https://tlsnotary.org/ Fraud proofing decentralized fiat-Bitcoin trading.
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March 21, 2013, 06:52:24 AM
 #66

Wrong, you could claim whatever you want about bitcoin, a certain stock, etc, but that doesn't make that particular investment a Ponzi scheme, as you are just another normal investor, you are in a no more special position than the next one in the line. What really matters is what the people "run" it say, which bitcoin doesn't have any, and every bit of information is open and freely accessible, if you don't look it up it's just your laziness and can't blame anyone else. Besides, as bitcoin is not run by any people, it will never promise you high income return, an essential part of the running of a Ponzi business, you will just have to do the risk assessment yourself.
I don't agree. One can certainly imagine a Ponzi scheme where the operator of the scheme never makes any false promises and just leaves that up to the early investors. So long as there is no realistic chance of a revenue source other than investment, earlier investors get money from later investors, and later investors are told that there is a reasonable expectation of an outside source of revenue, it's a Ponzi scheme.

If you believe that Bitcoin has no possible way of producing value other than by people buying Bitcoins in the hopes that the price will go up due solely to other investors who believe the same, you believe Bitcoin has no realistic chance of deriving significant value from being a means of exchange, and you further believe that some people are mislead into buying Bitcoins in the belief that it may ultimately have a source of revenue other than by investment, then it is reasonable to describe Bitcoin as a Ponzi scheme.

Just to be clear, I don't think those are reasonable beliefs. I think there's clearly a reasonable chance that Bitcoin will derive significant value from being a means of exchange and is most likely already deriving an amount of value from that source that is not insignificant.

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March 21, 2013, 07:00:09 AM
 #67

Wrong, you could claim whatever you want about bitcoin, a certain stock, etc, but that doesn't make that particular investment a Ponzi scheme, as you are just another normal investor, you are in a no more special position than the next one in the line. What really matters is what the people "run" it say, which bitcoin doesn't have any, and every bit of information is open and freely accessible, if you don't look it up it's just your laziness and can't blame anyone else. Besides, as bitcoin is not run by any people, it will never promise you high income return, an essential part of the running of a Ponzi business, you will just have to do the risk assessment yourself.
I don't agree. One can certainly imagine a Ponzi scheme where the operator of the scheme never makes any false promises and just leaves that up to the early investors. So long as there is no realistic chance of a revenue source other than investment, earlier investors get money from later investors, and later investors are told that there is a reasonable expectation of an outside source of revenue, it's a Ponzi scheme.


I am sorry, but this is the real world definition of "pyramid scheme", which is somehow not equivalent to "Ponzi scheme", to be a Ponzi scheme fraudulent activities of operators have to be involved.

https://tlsnotary.org/ Fraud proofing decentralized fiat-Bitcoin trading.
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March 21, 2013, 07:07:59 AM
 #68

I am sorry, but this is the real world definition of "pyramid scheme", which is somehow not equivalent to "Ponzi scheme", to be a Ponzi scheme fraudulent activities of operators have to be involved.
No. The difference between a Ponzi scheme and a pyramid scheme is that in a pyramid scheme, it is explicit that your revenue comes from those you sign up and recruiting is emphasized. In a Ponzi scheme, you are told you can just buy the investment and sit back and wait for it to appreciate in value or dividends to be paid.

And I totally disagree that a Ponzi scheme *must* have "operators" who make the misrepresentations. It is quite sufficient for the early investors to make those misrepresentations. And even so, I think it's reasonable to construe people like early adopters and Satoshi as "operators". These are not mathematically precise terms.

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March 21, 2013, 07:23:53 AM
 #69

I am sorry, but this is the real world definition of "pyramid scheme", which is somehow not equivalent to "Ponzi scheme", to be a Ponzi scheme fraudulent activities of operators have to be involved.
No. The difference between a Ponzi scheme and a pyramid scheme is that in a pyramid scheme, it is explicit that your revenue comes from those you sign up and recruiting is emphasized. In a Ponzi scheme, you are told you can just buy the investment and sit back and wait for it to appreciate in value or dividends to be paid.

And I totally disagree that a Ponzi scheme *must* have "operators" who make the misrepresentations. It is quite sufficient for the early investors to make those misrepresentations. And even so, I think it's reasonable to construe people like early adopters and Satoshi as "operators". These are not mathematically precise terms.

Every definition about Ponzi scheme out there mentions that it has to involve fraudulent activities ,check for yourself, if you want to make up your own definition, fine, but please make it clear in the first place. And yes, early investors could certainly setup Ponzi scheme with bitcoin as an instrument, but it would be silly to call bitcoin itself a Ponzi scheme, it's like not only calling Charles Ponzi's business a Ponzi scheme, but calling the postal reply coupon a Ponzi scheme as well.


https://tlsnotary.org/ Fraud proofing decentralized fiat-Bitcoin trading.
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March 21, 2013, 10:49:59 AM
 #70

I don't agree. One can certainly imagine a Ponzi scheme where the operator of the scheme never makes any false promises and just leaves that up to the early investors. So long as there is no realistic chance of a revenue source other than investment, earlier investors get money from later investors, and later investors are told that there is a reasonable expectation of an outside source of revenue, it's a Ponzi scheme.

But this is not what happens with bitcoin.
For one, no interest is involved unless you decide so.
So just by owning bitcoin you do not receive or require to give anything to support earlier investors.
Or maybe you can show me how my money goes to even earlier investors or how i get money from new investors?
And is a ponzi scheme still a ponzi if if can grow backwards and survive? Bitcoin has fluctuated quite dramatically in the past. I'm pretty sure i made some money off of old investors. So information can flow both ways and is not at all like the one way alley called ponzi scheme, right?
Maybe you can call it a balanced ponzi because anyone can cover for anyone and does so more or less at random.
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March 21, 2013, 11:16:55 AM
 #71

Quote
And I totally disagree that a Ponzi scheme *must* have "operators" who make the misrepresentations. It is quite sufficient for the early investors to make those misrepresentations. And even so, I think it's reasonable to construe people like early adopters and Satoshi as "operators". These are not mathematically precise terms.
Every definition about Ponzi scheme out there mentions that it has to involve fraudulent activities ,check for yourself, if you want to make up your own definition, fine, but please make it clear in the first place. And yes, early investors could certainly setup Ponzi scheme with bitcoin as an instrument, but it would be silly to call bitcoin itself a Ponzi scheme, it's like not only calling Charles Ponzi's business a Ponzi scheme, but calling the postal reply coupon a Ponzi scheme as well.
This is goalpost moving. Please either agree with my argument that a Ponzi scheme need not have "operators" or rebut it.

I agree that a Ponzi scheme must involve fraudulent activities and said as much. I 100% agree that unless you believe that there's fraud, you cannot call it a Ponzi scheme. That's why I said that you can only argue Bitcoin is a Ponzi scheme if you argue that people buy Bitcoins because they believe that there is or may be significant value to Bitcoins due to their present or future use as a means of exchange, they get that belief from people who stand to benefit from an increase in the price of Bitcoins, and that belief is not reasonable.

You claimed that even given these things, Bitcoin could still not be considered a Ponzi scheme for a variety of reasons, each of which I've rebutted.

And, again, for the record I believe that Bitcoin cannot be considered a Ponzi scheme because that belief is reasonable. You can argue, if you want, that widespread Bitcoin adoption as a means of exchange is unlikely and you can argue that it's inevitable, but I don't think you can argue that it's unreasonable to believe it's possible.

To rebut the argument that Bitcoin is a Ponzi scheme, it is very important to understand the *precise* difference between Bitcoins and a Ponzi scheme so that we can make the strongest possible arguments. The belief that those who buy Bitcoins today could possibly see a profit from the sale of those Bitcoins for use as a means of exchange is reasonable. That's a very weak statement, and so it should be very easy to convince people of, and that's all you need to convince them of to rebut the various "Bitcoin is a scam" arguments.

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March 21, 2013, 11:31:02 AM
 #72

Quote
And I totally disagree that a Ponzi scheme *must* have "operators" who make the misrepresentations. It is quite sufficient for the early investors to make those misrepresentations. And even so, I think it's reasonable to construe people like early adopters and Satoshi as "operators". These are not mathematically precise terms.
Every definition about Ponzi scheme out there mentions that it has to involve fraudulent activities ,check for yourself, if you want to make up your own definition, fine, but please make it clear in the first place. And yes, early investors could certainly setup Ponzi scheme with bitcoin as an instrument, but it would be silly to call bitcoin itself a Ponzi scheme, it's like not only calling Charles Ponzi's business a Ponzi scheme, but calling the postal reply coupon a Ponzi scheme as well.
This is goalpost moving. Please either agree with my argument that a Ponzi scheme need not have "operators" or rebut it.

I agree that a Ponzi scheme must involve fraudulent activities and said as much. I 100% agree that unless you believe that there's fraud, you cannot call it a Ponzi scheme. That's why I said that you can only argue Bitcoin is a Ponzi scheme if you argue that people buy Bitcoins because they believe that there's is or may be significant value to Bitcoins due to their present or future use as a means of exchange, they get that belief from people who stand to benefit from an increase in the price of Bitcoins, and that belief is not reasonable.


It's not goalpost moving, you said "In a Ponzi scheme, you are told you can just buy the investment and sit back and wait for it to appreciate in value or dividends to be paid", this is something which can be 100% non-fraudulent, and thus not sufficient to define a Ponzi scheme.

And I don't know why you have to insist that a neutral instrument like bitcoin itself could become a Ponzi scheme just because what people do with it, unless the protocol itself is designed to help the creation of such a scheme.

https://tlsnotary.org/ Fraud proofing decentralized fiat-Bitcoin trading.
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March 21, 2013, 12:13:15 PM
 #73

It's not goalpost moving, you said "In a Ponzi scheme, you are told you can just buy the investment and sit back and wait for it to appreciate in value or dividends to be paid", this is something which can be 100% non-fraudulent, and thus not sufficient to define a Ponzi scheme.
I agree. "In a car, you can eat dinner" doesn't mean any place you can eat dinner is a car. I never claimed that was sufficient to define a Ponzi scheme, only that it was what distinguished a Ponzi scheme from a pyramid scheme.

Quote
And I don't know why you have to insist that a neutral instrument like bitcoin itself could become a Ponzi scheme just because what people do with it, unless the protocol itself is designed to help the creation of such a scheme.
It wouldn't be just the instrument itself. As I argued, numerous other components would be necessary, including prior investors using deception to lure future investors and including having no reasonable source of legitimate profits to be distributed to investors other than investments. (And, again, I don't personally believe those things are true of Bitcoin. But that's what you have to address to rebut the argument that Bitcoins are a Ponzi scheme.)

You keep changing your arguments and refusing to either respond to my arguments or agree with them. One last chance for me to keep my presumption that you are arguing in good faith:

1) Either agree with or rebut my argument that a Ponzi scheme does not need "operators" or that, to the extent it does, Bitcoin has them.

2) Either agree with or rebut my argument that Bitcoin is more like a Ponzi scheme than a pyramid scheme because there is no requirement that you recruit people to make money and no downline but instead the claim is more that you can just put money in, do nothing, and take money out. That is the key difference between a Ponzi scheme and a pyramid scheme.

(Of course, you are free to make new arguments or continue other ones. But you cannot simply ignore an argument I've made and move on to just something else. You must do me the courtesy of agreeing with or rebutting the arguments I've made as I've extended that same courtesy to you.)

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March 21, 2013, 12:23:25 PM
 #74

It's not goalpost moving, you said "In a Ponzi scheme, you are told you can just buy the investment and sit back and wait for it to appreciate in value or dividends to be paid", this is something which can be 100% non-fraudulent, and thus not sufficient to define a Ponzi scheme.
I agree. "In a car, you can eat dinner" doesn't mean any place you can eat dinner is a car. I never claimed that was sufficient to define a Ponzi scheme, only that it was what distinguished a Ponzi scheme from a pyramid scheme.



Quote
I agree. "In a car, you can eat dinner" doesn't mean any place you can eat dinner is a car. I never claimed that was sufficient to define a Ponzi scheme, only that it was what distinguished a Ponzi scheme from a pyramid scheme.

We may think about the same thing, but since you said in a pyramid scheme investors know too well their money can only come from later investors, so there is possibly no defrauding involved, I would assume anything distinguishing the two may involve some fraudulent elements, but of course it may not be the only one, I don't want to investigate further though.

Quote
And I don't know why you have to insist that a neutral instrument like bitcoin itself could become a Ponzi scheme just because what people do with it, unless the protocol itself is designed to help the creation of such a scheme.
It wouldn't be just the instrument itself. As I argued, numerous other components would be necessary, including prior investors using deception to lure future investors and including having no reasonable source of legitimate profits to be distributed to investors other than investments.

If you are talking  about the whole Bitcoin community as a whole I would not argue, but I always find the need to emphasize the neutrality of the infrastructure itself, the narrowed-down definition of Bitcoin, to dispel the FUDs.

https://tlsnotary.org/ Fraud proofing decentralized fiat-Bitcoin trading.
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March 21, 2013, 12:41:50 PM
 #75

I'm still wondering.
Is it possible for a ponzi or a piramid scheme to decrease in size in a stable manner?
I mean, is there some mathematical valley of stability that could allow the price of bitcoin to go from $30 to $2 dollars and then grow to $70 through several 'horizontal' periods?
The reason i bring this up is that i think that in a situation where you need new investors to pay off old ones such a balance (the way bitcoin price has changed over time) would be impossible to maintain.
So to me that is the strongest evidence that bitcoin is not composed only of pozi scheme or piramid scheme but in fact has some real financial bottom to it.
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March 21, 2013, 01:25:21 PM
 #76

The reason i bring this up is that i think that in a situation where you need new investors to pay off old ones such a balance (the way bitcoin price has changed over time) would be impossible to maintain.
So to me that is the strongest evidence that bitcoin is not composed only of pozi scheme or piramid scheme but in fact has some real financial bottom to it.
This seems to me to be a very good argument. It does seem improbable that a scam could increase and decrease in value, sometimes remaining at a fairly stable point for some time. Either a scam is an amazing investment or people should be abandoning it. A feedback loop seems very difficult to sustain unless it has a significant component that's not speculative. I certainly can't think of any precedent offhand.

Theoretically someone could manipulate a market to do that. For example, Pirate could have made extra money by stalling a payment (claiming he had "difficulties", causing panic selling as people fear the Ponzi is collapsing) and then buying up his own debt at a discount through straw buyers. Then when he makes up the stalled payments with a little extra "to apologize", the price soars and he sells his own debt. Theoretically, a manipulator could do that for a few cycles. But pretty quickly the panic selling will stop. And besides, you can't do that with Bitcoins directly, you'll lose money. The manipulator has to be the counterparty in the majority of transactions (otherwise, anyone else can take all the profit you intended for yourself), and I doubt anyone could do that with Bitcoins.

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March 22, 2013, 12:16:31 PM
 #77

You cannot have a Ponzi scheme without a Mr. Ponzi type person lying to customers.

Any significantly advanced cryptocurrency is indistinguishable from Ponzi Tulips.
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March 22, 2013, 12:22:07 PM
 #78

Is BitCoin a Ponzi or pyramid scheme?
No, not in the traditional sense.
But...
We need a bunch more new bag-holders to take this rocket ship up to $100 next week!  Cheesy

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March 22, 2013, 01:44:06 PM
 #79

You cannot have a Ponzi scheme without a Mr. Ponzi type person lying to customers.
As discussed above, you can if the earlier investors make unreasonable representations to later investors in order to get new investors whose investment will wind up in the hands of the earlier investors. The earliest investors in a Ponzi scheme have the same incentive the creator of the scheme does.

Pirate, for example, could have just said "I'm borrowing money and paying x% interest" (which is true). He then could have shut up and let just his investors keep the hype going and make the misrepresentations about where the money was going. It still would have been a Ponzi scheme.

These aren't precise legal distinctions. The term "Ponzi scheme" covers a range of schemes with fuzzy boundaries. Their general attributes are:

1) Investors believing claims that they can get returns way above what legitimate investments provide.

2) Investors believing claims that their investment is very low in risk relative to the expected returns.

3) No reasonable expectation of a source of revenue for investors other than contributions from later investors.

4) No requirement for investor participation to get revenue.

5) Earlier investors are in fact paid from the investments of later investors.

Bitcoin meets all of these criteria except 3.

If someone claims Bitcoin is a Ponzi scheme and you want to address that claim head on and honestly, what you have to argue is that there's a reasonable expectation that Bitcoins will appreciate in value over the long term due to demand for Bitcoins as a means of exchange. If you don't believe that, then Bitcoins as an investment basically *is* a Ponzi scheme.

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March 22, 2013, 01:48:32 PM
 #80

You cannot have a Ponzi scheme without a Mr. Ponzi type person lying to customers.
As discussed above, you can if the earlier investors make unreasonable representations to later investors in order to get new investors whose investment will wind up in the hands of the earlier investors. The earliest investors in a Ponzi scheme have the same incentive the creator of the scheme does.

Pirate, for example, could have just said "I'm borrowing money and paying x% interest" (which is true). He then could have shut up and let just his earliest investors keep the hype going and make the misrepresentations about where the money was going. It still would have been a Ponzi scheme.

Pirate was not selling Bitcoins. He was selling a different product of his own design. Apples and oranges.

Any significantly advanced cryptocurrency is indistinguishable from Ponzi Tulips.
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